Rules, Principles and Debates

The accounting profession has generally never been one that rushes to change the way it does anything without first conducting a thorough analysis and debate of the issue at hand.

The topic of rules-based versus principles-based accounting is no exception. While the issue has long been high on the profession's radar, the series of accounting scandals at Enron, WorldCom and others has further fueled the debate.

Assembling a panel of accountants, attorneys, standards setters and academics to discuss the subject makes for some interesting conversation, which I had the pleasure of witnessing firsthand yesterday afternoon at roundtable at Baruch College.

But before they even got fully into the debate over rules-versus-principles, some of the sixteen roundtable participants first wanted to debate the issue of whether or not the current rules-based system was to blame in part or in full for the above-mentioned scandals.

While proponents of the rules-based approach insisted that rules-based GAAP didn't cause the financial reporting breakdowns that led to the scandals, those who favor a move to a principles-based system took exception to the idea that the rules-based system didn't contribute to Enron and company.

But back to the topic of which approach is better. One supporter of sticking with the rules-based system cited transparency and costs savings as benefits, and argued that a principles-based approach would be susceptible to manipulation.

That of course, was followed by a response from a proponent of switching to principles, who argued that adopting an approach that is devoid of so-called bright lines would allow everyone to spend less time explaining how a standard operates and to focus more on the conceptual framework and on the business and economic reasons for a transaction, which he said, in turn, would lead to better audits.

Now, throw fourteen others, as well as a moderator, into the conversation and you can imagine what happens. And so began the arguments over whether a principles-based accounting system provides a truer picture of a company's financial condition, as advocates say it does, or whether it will create ambiguity and make it more tougher to hold those who prepare financial reports accountable for improper accounting, as critics contend.

The conversation took on what can only be described as a "spirited" tone, and produced some entertaining banter between attorney Melvyn Weiss, of Milberg Weiss Bershad & Schulman and the Financial Accounting Standards Board's Katherine Schipper.

Thanks to a looming deadline that required my early departure, I didn't get to see whether either side clearly prevailed in this round of the principles versus rules debate. If the early portion of the roundtable discussion was in any way indicative of how the bigger picture debate will go, it's safe to say the profession won't rush to any decisions on this issue either.